Launch of the Economic Survey of the Russian Federation 2013 at the Gaidar Forum

Remarks by Angel Gurría, OECD Secretary-General, delivered at the Gaidar forum for the launch of the Economic Survey of the Russian Federation 2013

15 January 2014, Moscow, Russian Federation

As prepared for delivery

First Deputy Prime Minister Mr Shuvalov, Ladies and Gentlemen,

Thank you for your kind invitation to this year’s Gaidar Forum, it is always a great pleasure to be in Moscow. I would like to share with you the results of our latest Economic Survey of the Russian Federation, which we are launching today. This is our ninth Economic Survey, and the third since the launch of the process of accession of the Russian Federation to the OECD.

Let me also take this opportunity to thank the Minister of Economic Development Mr Alexey Ulyukaev and Deputy Minister Klepach for their support and close cooperation in the preparation of this Survey.

Economic improvements are setting the stage

Despite the slowdown of the world economy, Russia has continued to grow. Most importantly, your macroeconomic house is basically in order, with inflation largely under control, public finances close to balance, and a current account surplus.

Over the recent past, we have also seen major improvements in Russia’s economic policy setting, particularly on monetary and fiscal policy issues. Specifically, a fiscal rule was introduced requiring that oil revenues above the benchmark prices be directed to the existing oil funds, and limiting budgetary deficits to 1% of GDP.

Our Survey also acknowledges improvements in the business environment. The ambitious National Entrepreneurial Initiative, for example, is addressing administrative burdens in close cooperation with business. We also welcome the recently announced reform of the pension system, which should make the system more sustainable by reducing early retirement and boosting labour supply.

But the economy remains at a crossroads

Yet, Russia’s economy is at a crossroads. Activity lost steam in 2013, with GDP rising by 1.5%, down from 3.4% in 2012. While we expect growth to pick up, our forecasts show that it will remain below 3% until at least 2015, far below the 7% achieved between 1999 and 2008 and the authorities’ 5% medium-term growth ambition.

This slowdown is a source of concern. It is more structural than cyclical, as employment and capacity utilisation rates are near their pre-crisis boom records. This slowdown implies that the speed of convergence in productivity and living standards with the more prosperous OECD countries has also slowed substantially since the crisis.

The root causes of the slowdown and the limits to Russian growth are well-known and reflect various imbalances in the economy. Russia’s economy today depends heavily on its rich endowment of natural resources. The moderation in oil and gas prices and the slowdown in world demand have therefore taken a hefty toll on growth in Russia. Corruption and concerns over the rule of law remain major obstacles to market entry and foreign investment. They create inefficiencies in resource allocation, which thwarts the economy’s growth potential.

Russia’s growth prospects are further impacted by a long-term decline in the labour supply, driven by low fertility rates, high premature mortality rates, particularly among men, and early retirement. For example, the current pension age, at 60 years for men and 55 years for women, is very low by international comparisons; particularly if we bear in mind that women in Russia outlive men by 12 years on average. Growth is also stifled by other long-standing challenges: weak competition in product markets, transport bottlenecks in urban centres, regional inequalities, and low innovation, among others.

Transforming exceptional potential into exceptional performance

Russian policymakers can do much to address these obstacles to growth via structural reforms. Russians deserve the opportunity to turn their exceptional potential into exceptional performance. In this respect, our Survey puts forward a number of key recommendations which focus on tackling the principal challenges.

A transparent and predictable business environment is a prerequisite for market development. But today in Russia, natural resource wealth and entry barriers create opportunities for reaping large rents, divert resources from other productive activities, and stifle innovation and entrepreneurship. That is why it is so important to promote competition in domestic markets and for Russian businesses to make the most of the benefits of participating in global value chains and to add value to their exports. This is also why privatisation should go hand in hand with fostering a level playing field between private companies and the remaining state-owned enterprises. The strong and highly regarded Federal Antimonopoly Service could be tasked with this role.

We also see a need for further separation between politics, business and law enforcement. President Putin’s recent amnesty sent a good signal, but to make real, consistent progress, it remains essential to strengthen independence of the judiciary in its day-to-day operations. Improving rules and transparency -- including the appointment, promotion, assignment and salaries of judges -- is a crucial and necessary step forward.

In addition, the receding cost of graft is a very positive sign that authorities remain dedicated to tackling corruption. This process however needs broad-based local support. Citizens should be encouraged to expose breaches of the law, whistle-blowers should be protected more effectively, and the recommendations of the OECD Working Group on Bribery need to be implemented swiftly.

Lastly, administrative burden – which makes business more difficult than necessary on a daily basis – is pervasive in Russia. There is a need to foster a more entrepreneurial culture. Only 1 out of 50 Russians considers becoming an entrepreneur, compared to 1 out of 4 in other countries with comparable income!

Focusing on an equal, skills-based society

To make the most of your people and to move toward a more equal and skills-based society, you will also need to invest more in human capital, innovation and infrastructure.

The Survey identifies that increased educational spending, particularly in poorer regions, should be a priority on top of efficiency improvements. Russia currently spends only 2.4% of GDP on non-university education compared to the OECD average of 4%. Restructuring of vocational and higher education institutions should continue in combination with improving the curricula and strengthening links with the business sector.

Similarly, the skills gap needs to be better addressed. The Russian labour market is very flexible. This helps to achieve a low unemployment rate, but excessive labour turnover limits incentives to invest in skills – every third employee changes his or her job during a year! Only 1 out of 10 Russian workers participate in further education and training compared to more than half in many OECD countries. The Survey therefore encourages more balanced industrial relations, as well as strengthening lifelong learning, activation programmes and temporary income support to the unemployed in order to promote transitions to quality jobs.

In addition, while Russia has been a scientific giant for a long time, its current innovative outputs in terms of articles, patents and, most importantly, innovative products, are disappointing. Only 1 out of 10 Russian manufacturing firms innovate compared to 8 out of 10 in Germany. We recommend a more broad based and bottom-up support for the adoption of new technologies, especially by SMEs, including outside the high-tech sector, and for improving energy efficiency. Completing the reform of the public R&D sector is also important, in particular by shifting scarce public resources towards competitive channels of funding.

Last but not least, the modernisation challenge is considerable, but it can be met by improving the efficiency and prioritisation of infrastructure spending, by promoting competition and better managing traffic and public transport in cities. Our Survey identifies that transport problems in big Russian cities, such as Moscow and St. Petersburg, have become a particularly important constraint on economic development; and though spending on transport infrastructure has been on the rise in the past decade, it needs to remain considerable.

First Deputy Prime Minister, Ladies and Gentlemen:

Let me conclude by highlighting Russia’s impressive efforts in the face of a daunting economic environment. Russia has remained on a positive growth path at a time when many countries around the globe still struggle to exit the recession. But key challenges persist. First and foremost, growth must become sustainable and fair through the implementation of the right policy mix. The road ahead remains long but we hope that the launch of our latest Survey will provide inspiration and guidance about the current economic challenges.

A slowing economy is never good news. But as your great writer Fyodor Dostoyevsky once said: “The greatest happiness is to know the source of unhappiness”. And this is where the OECD may be able to help. We draw from experiences and lessons learnt; we analyse what works in other countries and how it can be adapted to the Russian context in order to achieve Better Policies for Better Lives.